Implications of the current EU sanctions for the transaction business

On 24 February 2022, Russian armed forces invaded Ukraine. In response, the EU – as well as many countries – imposed various sanctions and tightened the existing ones. The related uncertainties surrounding the existing and future business relations with Russia and Belarus have an impact on the M&A business, too.

Overview of EU sanctions

Restrictive measures have been in place against Russia since 2014 due to the annexation of Crimea. In respect of Belarus, such measures were imposed as far back as 2006.

One should distinguish between individual sanctions on the one hand and measures related to specific sectors of economy, especially in the areas of the movement of capital and payments, on the other hand. Specifically, there are sanctions against certain Russian natural and legal persons, entities and bodies (Regulation (EU) No 269/2014), as well as the so-called sectoral sanctions (Regulation (EU) No 833/2014) where it is often irrelevant whether a particular individual is involved or not.

Comparable, yet not identical, sanctions were imposed also against Belarus (Regulation (EC) No 765/2006).

In view of recent developments, the EU has considerably tightened these original council regulations by introducing numerous sanction packages, especially sectoral sanctions, most recently on 15 March 2022. It should be noted that these changes or tightening measures have not yet been included in the current consolidated versions of the original council regulations, which makes it difficult to get an overview of the exact scope of the sanctions. Therefore, not only the original council regulation but all its subsequent amendments should be taken into account.

In addition, there are specific sanctions concerning the regions of Crimea/Sevastopol (Regulation (EU) No 692/2014) and the Donetsk and Luhansk oblasts of Ukraine (Regulation (EU) No 263/2022).

Content of EU sanctions

Individual sanctions are intended to prevent the direct or indirect provision of assets or economic resources to certain listed natural and legal persons, entities and bodies (the so-called provision ban). In particular the term of an economic resource as well as issues related to the indirect provision ban raise serious legal questions.

Sectoral measures include a ban on the export of certain goods and technologies. Furthermore, the import of certain goods from Russia or Belarus into the EU is prohibited. This includes related services, in particular technical support, brokering and financing. In addition, the sanctions against Russia and Belarus contain comprehensive restrictions on the movement of capital and payment transactions.

A violation of the sanctions can have consequences under criminal and administrative offence law. Contracts concluded in contravention of existing sanctions are void.

Impact on the M&A business

However, the impact of sanctions is not limited only to business transactions with sanctioned natural and legal persons, entities and bodies, or to the trade in goods and services affected by sectoral sanctions. Also in the M&A business, increased attention should be paid to sanctions, especially if a transaction involves any of the sanctioned countries. Such involvement obviously exists if, for example, a target company is based in Russia or Belarus. But already individual contracts with persons or companies in or from these countries can also be relevant in terms of liability.

As part of due diligence, it is therefore important to analyse and evaluate relationships that may involve the issue of sanctions. In particular, individual contracts with customers, suppliers, but also employees should be examined. The latter should not only be considered in terms of individual sanctions, but can also be relevant as regards the application of the EU regulations. This could be the case, for example, if an EU citizen acted as a manager in the target company, but the company itself would not fall within the scope of application of the EU regulations. From a practical point of view, it is advisable to screen the corresponding contracts with the use of technical assistance and to examine suspicious cases separately.

Increased attention should also be paid to general compliance structures at the target company.

In this context, it is reasonable to coordinate information with the authorities responsible for sanctions, i.e. the Federal Office for Economic Affairs and Export Control (BAFA) or the Bundesbank. However, due to the constantly changing situation around sanctions, it should be noted that such information can only represent a snapshot of the current situation.

This can therefore considerably delay a due diligence process and lead to a significant additional workload. In addition, the fact of the sanctions being constantly tightened should be kept in mind.

Finally, the findings obtained from due diligence should be considered in the purchase agreement, e.g. through closing conditions (conditions precedent) or indemnification clauses. In addition, attention should be paid to the post-closing phase. Existing or future sanctions can be adequately taken into account in new contracts, e.g. by including sanction clauses.

Conclusion

The current sanctions against Russia and Belarus have a considerable impact on the M&A business, too. In addition to the aforementioned difficulties, the implementation of M&A measures can also be superimposed by purely factual obstacles. As certain companies and credit institutions are exiting the Russian and Belarusian markets, also other aspects such as smoothly operating supply chains or financing should be reassessed. The overall assessment should also take into account reciprocal sanctions imposed by Russia and Belarus.